Market Efficiency and Return Statistics : Evidence from Real Estate and Stock Markets Using a Present-Value Approach

This paper develops a methodology to identify asset price response to news in the framework of Campbell-Shiller log-linear present-value equation. We show that slow price adjustment not only induces high serial auto correlation in real estate excess returns, but also dampens their volatility and correlation with other asset returns. Using Hong Kong real estate and stock market data, we find that the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully. Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby restores real estate return volatility and correlation with the stock market